Ray Fisman on Structural Unemployment

Hurst notes that fewer and fewer Americans with a high school education or less are finding employment in manufacturing. This is a trend that accelerated in the late 1990s. Some of those lost jobs resulted in twentysomethings exiting the labor force. But a great many were absorbed by a thriving construction sector. Between 1998 and 2007, the share of lower-education men employed in manufacturing fell from 15 to 10 percent, virtually a mirror image of construction, where the share increased from 15 to nearly 20 percent.

As you know, I am very sympathetic to the view that the period 2000-2010 should be viewed as one of long-term structural decline in the prospects for low-skill males, with the housing boom providing a temporary offset. However, keep in mind two counter-arguments.

1. Overall, the construction sector is very small. I would not want to try to defend the view that the entire boom and bust was in construction.

2. There is still the question of why so much of the lower demand for low-skilled workers translates into reduced employment rather than lower wages. Is it nominal wage rigidity, in which case monetary expansion would provide a cure? Or are there structural factors on the supply side of the labor market that are making dropping out of the labor force more attractive? See the new CBO report on disability. Or, from a different perspective, see Conor Sen on the possibility that leisure has become more highly valued.

In fact, I winced reading this from Fisman:

If Hurst is right, we're now adjusting to a new normal, one in which there are fewer manufacturing jobs to go around and no housing boom to absorb all the unskilled workers who could have found work in a less globalized and computerized era.

The phrase "fewer manufacturing jobs to go around" is lump-of-work-ish. As an economist, you don't want to put things that way. Instead, talk about a decline in the relative demand for low-skilled labor, and then talk about how that decline gets divided between lower wages and lower employment.

Note that some people complain that wages of workers at or below the median have not done well. But one can argue that those wages have done too well, and the evidence for that is the huge drop in employment among men without college degrees.

A lot of pundits write as if more aggregate demand would boost both wages and employment among low-skilled workers. However, in standard textbook macro, aggregate demand would increase employment by reducing the real wages of workers.

As you know, I prefer not to think in terms of aggregate demand. Instead, I prefer to think of macro as what Peter Howitt calls a coordination problem, one that I describe as entrepreneurs trying to discover sustainable patterns of sustainable specialization and trade.

Comments and Sharing

Well, how about the higher education bubble that everyone keeps talking about? Anthropology degrees and business management graduate certificates sure do keep a guy occupied while he's out of the workforce.

I think the developed world is in a bit of denial, actually. The downward pressure on wages is palpable. It's everywhere. People in India and Mexico are well-educated, highly skilled, and willing to work for less. For now, that fact is dressed up in the public dialogue as a conversation on "outsourcing," but the truth of the matter is that the "developing" world is catching up and wages are starting to equilibrate.

I suspect the recent trend toward trade protectionism and anti-immigration policy is a product of our resistance to competition.

There are fewer manufacturing jobs to go around. Just as there are fewer agricultural jobs to go around than there were in 1900. Maybe your concern is the rhetorical impact of Fisman's phrasing choice, but there's nothing literally wrong with it. Discussing the decline of a sector doesn't commit the lump-of-work fallacy.

A lot of pundits write as if more aggregate demand would boost both wages and employment among low-skilled workers. However, in standard textbook macro, aggregate demand would increase employment by reducing the real wages of workers.

It reduces the real wages while increasing real incomes (by increasing hours worked, which gets split up between reduced unemployment and longer workdays). The long-term complaint has been about the real incomes of workers, not their wages. People tend to use the terms interchangeably because holding hours worked constant they are the same, but right now hours worked is not constant with respect to AD stimulus.

As an employer, here are my thoughts on why headcount reductions and not lower wages:

1) if you lower wages, everyone whose wages are cut is unhappy and has more idle time to complain, and feels less busy, whereas if you reduce headcount the ones who remain are happier and busier than they would otherwise be;

2) Were a firm to cut wages across the board, the best talent will be hired away first and overall the employer suffers more by losing them and keeping everyone else at lower pay, than by jettisoning the worst workers and paying the best as if there was nothing wrong; the employer who is willing to direct resources toward the best employees will get them and their marginal product, and the rest will suffer competitively.

3) Employees generate non wage costs, especially in insurance, that cannot be cut proportionately such that even a large wage cut may not be enough to create a profit margin.

4)there are always marginal facilities, marginal employees, marginal lines of business,that are only supportable in periods of peak and near peak demand; if demand falls more than a little and is perceived to be staying down, they generate losses at all plausible wages. So no wage adjustment works. And a firm's better facilities and lines of business may not need or be able to accommodate additional persons without massive capital expenditure that is not justifiable.

5 Poor employees cause so many problems that they are effectively negative output, that is, even if they showed up for free you would not want them there.

6) in some businesses, where the durability of the firm is important, wage cuts send a bad message to customers that the firm is doing badly, which may lead to customer erosion. In the long run it may be worth it to stand the pain of lower profits as an owner for the short and medium term in the hope that a shakeout among your competitors positions you better for the long term. If a firm and its customers are both in low margin cutthroat businesses this may not be an issue but in higher margin services it definitely is.

7) Severance from one time layoffs is usually accounted for in GAAP as a non-recurring, below the line, cost, while wages and benefits to ongoing workers are not, which may matter depending on what metrics your investors and lenders look at to evaluate you.

I'm not sure it's appropriate to call somebody low skill if they can frame up a house, install plumbing/electrical, install molding that looks good, lay ceramic tile, install a paver brick driveway that is even and won't sag, use cad software to design new homes, Not to mention do all of this in an efficient way that can earn a person money. Most people could not look at drawings of a house and turn a pile of lumber into a frame.

I think part of the problem is back 50 years ago in Charles Murray white America, a male could do very well with a high school diploma, street smarts and strong work ethic. Now the super competitive job market and globalization, that is not enough skills to earn a decent living for a family of four. Lower wages and benefits will probably mean the Democrats will win more and the birth rate will continue to drop. It does seem to be the great contradiction that as society prospers that the lower wages diminish.

Long run either the lowering birth rates will cut labor supply enough to where employers to pay or train more or we have a streak of global nationalism to slow the growth of gloablization.

I’m not exactly sure if I can manage to ask this in an understandable way, but here goes.

Are you confident that there is a decline in the prospects for any given individual?

There are some people who turn out “unsuccessful” for whatever reason. They used to be a small portion of the group labeled "high school education or less". That group also included a lot of bright, hardworking individuals who didn't go to college for whatever reason. They went straight into the workforce and did well.

As more people bought into the idea that getting a college education means higher lifetime earnings, more of those “bright, hardworking individuals” enrolled instead of heading straight into the workforce. Now the “unsuccessful” make up a larger portion of the group labeled "high school education or less" dragging down the average. The “bright, hardworking individuals” who would have done well without college are now counted in the college educated group.

I enlisted in the military after high school and retired a few years ago. The military strongly encourages the enlisted to take distance learning college courses. The military pays for the courses and uses completions as a factor when deciding who gets advanced to a higher pay grade. I’ve taken quite a few of them, but they didn’t help me get a job after the military, or have an impact on my salary. The only difference is I’m now in the group labeled “some college” instead of "high school education or less".

The question is if bright, hardworking individuals were to choose to go straight into the workforce is there less opportunity for them now?

@Joe Cushing. I totally agree with you. However, in an economy with low housing demand, such a worker is effectively unskilled.

The economy was unnaturally steered pretty strongly towards housing. Workers responded to the market signal by developing specialization in this area. There was malinvestment of their own learning resources thanks to unsustainable housing activity.

Eventually, employers may figure out that people who can calculate angles and cuts for hip rafters might well be able to figure out how to run a computerized milling machine, etc... My own view is that such workers would have found their way to jobs and other forms of specilization of their labor skills much earlier had they not been distracted by ap the artificial housing boom.

@Mark
Well thought-out comment! You have obviously been there.
Just a couple of words on the other side of the coin. Having conducted several (too many) "exit interviews," I have observed the emotional toll loss of a job can take. Also, while the loss of a comrade in arms can give rise to a feeling of relief (that it wasn't me), there can be a severe drop in morale tinged with survivor guilt. Finally, owners / managers who share both the profits (in good times) and the pain (in bad times) may see a rise in employee morale; this builds on the concept of a company that wins and loses as a team (rather than a set of individuals).

Let M be the figure of Merit of a person as an employee. M is vaguely but positively correlated with education. It's also correlated with intelligence, work ethic, attitude, and so on.

In many fields, the demand for people with High M is stable, while the demand for people with Low M has gone down, sometimes to zero.

Put another way, a person with only a (perhaps poor) high school education, and no good work history, doesn't have a "low value" or even "less than minimum wage" value, they have zero value or negative value. At least so long as automation is at hand.

This is not new. Huge numbers of farm jobs for people ill prepared to do anything other than shovel animal waste and carry heavy objects are simply gone.

Construction is still lagging in automation, so it will be a natural refuge of such people.

Manufacturing is in many ways leading in automation, and so its demand for High M people will go up and its demand for Low M people will go down. Until a fairly small number of very highly skilled people are paid a lot to make things with swarms of robots and zero or near zero manual labor.

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There was an article in cutting tool engineering that I meant to send to Dr. Kling w.r.t. "why not hire more?". A column written by a manager of a machine shop who noted that an employee had defiled the restroom in the worst imagineable way and done physical damage to it. Never identified. Ends with the remark that he looks forward to a time when his shop will have all CNC machines and robots and no people whatsoever, as life will be so much easier.

People are a pain, so nobody wants to hire them unless they have High M.

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